

[Federal Register: January 23, 2006 (Volume 71, Number 14)]
[Notices]               
[Page 3595-3598]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ja06-108]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53124; File No. SR-NYSE-2005-37]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving a Proposed Rule Change and Amendments No. 1 and 2 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 3 Thereto Relating to Amendments to Certain Sections of 
the Exchange Constitution Concerning the Exchange's Hearing Board and 
Related Amendments to Exchange Rule 475 and Rule 476

January 13, 2006.

I. Introduction

    On May 23, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend Article IX of the Exchange's Constitution 
and Exchange Rules 475 and 476 to modify certain aspects of the 
Exchange's disciplinary procedures and to provide a structure for a 
summary suspension hearing and a ``call up'' procedure for review by 
members of the Board of Directors (``Board''), certain members of the 
Board of Executives listed in NYSE Rule 476(f), any member of the 
Regulation, Enforcement and Listing Standards Committee, and either the 
Division of the Exchange that initiated the proceedings or the 
respondent. On September 9, 2005, the NYSE filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as amended by Amendment 
No. 1, was published for comment in the Federal Register on October 26, 
2005.\3\ The Commission received no comments regarding the proposal, as 
amended. On November 28, 2005 and December 2, 2005, the NYSE filed 
Amendments No. 2 \4\ and 3,\5\ respectively, to the proposed rule 
change. This order approves the proposed rule change, as amended by

[[Page 3596]]

Amendments No. 1 and 2, grants accelerated approval to Amendment No. 3, 
and solicits comments from interested persons on Amendment No. 3 to the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 52638 (October 19, 
2005), 70 FR 61866.
    \4\ In Amendment No. 2, the Exchange makes minor, non-
substantive changes to the rule text contained in Exhibit 5 of the 
proposed rule change. This was a technical amendment and is not 
subject to notice and comment.
    \5\ In Amendment No. 3, the Exchange proposes that the proposed 
rule change, as amended, be implemented on or about April 1, 2006 
and attaches a revised Exhibit 5 to reflect changes made to the rule 
text in Amendments No. 1 and 2.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to amend Article IX of the Exchange's 
Constitution and NYSE Rules 475 and 476 to modify certain aspects of 
the Exchange's disciplinary procedures and to provide a structure for a 
summary suspension hearing and a ``call-up'' procedure for review by 
members of the Board, certain members of the Board of Executives listed 
in NYSE Rule 476(f), any member of the Regulation, Enforcement and 
Listing Standards Committee, and either the Division of the Exchange 
that initiated the proceedings or the respondent.

Amendment to NYSE Rule 475

    NYSE Rule 475 currently provides a process for the Exchange: (i) To 
prohibit or limit a person with respect to access of services offered 
by the Exchange, or (ii) to summarily suspend an Exchange member or 
member organization facing certain circumstances, such as financial or 
operating difficulties, or expulsion or suspension by another self-
regulatory organization. The proposed rule change would provide a 
structure for such a hearing and for a ``call-up'' procedure for review 
by members of the Board and certain members of the Board of 
Executives,\6\ any member of the Regulation, Enforcement and Listing 
Standards Committee, and either the Division of the Exchange that 
initiated the proceedings or the respondent.
---------------------------------------------------------------------------

    \6\ These are members of the Board of Executives representing 
the groups referenced in clauses (ii) and (iii) of Article V, 
Section 2(b) of the Exchange's Constitution, namely, members who 
spend a substantial part of their time on the trading floor.
---------------------------------------------------------------------------

Amendments to Article IX of the Constitution and NYSE Rule 476

Composition of the Hearing Panel
    The Exchange currently requires that disciplinary hearings be 
conducted before a Hearing Panel consisting of a Hearing Officer (an 
Exchange staff member) and two peer panelists. The Exchange believes 
that this ``trial by peers'' requirement raises a concern about bias 
and perception of bias, especially in cases involving charges against 
individuals on the trading floor because of the relatively small floor 
community. Accordingly, the Exchange proposes that a Hearing Panel 
consist of at least one member who is engaged in securities activities 
differing from that of the respondent. In any disciplinary proceeding 
involving activities on the floor of the Exchange, the Exchange also 
proposes that no more than one of the persons serving on the Hearing 
Panel be, or if retired, has been, active on the floor. For example, 
with respect to cases involving the trading floor, the intent of the 
proposal is such that charges against a specialist or floor broker 
would be heard before a panel consisting of no more than one individual 
employed on the trading floor. In addition, the Exchange proposes that 
a Hearing Panel could include only one retired person.
Composition of the Hearing Board and Hearing Officers
    The Exchange also proposes to eliminate the requirement that 
Exchange Hearing Officers be employees or officers of the Exchange, 
thereby enabling the Exchange to retain outside professionals to serve 
as Hearing Officers, if needed. However, under the amendments to the 
Exchange's Constitution and NYSE Rule 476, an individual who is, or was 
within the last three years, a member, allied member, or registered or 
non-registered employee of a member or member organization would not be 
eligible to serve as a Hearing Officer. The proposed rule change also 
would allow former members, allied members, and registered and non-
registered employees of members and member organizations to be 
appointed to the Hearing Board within five years of their 
retirement.\7\
---------------------------------------------------------------------------

    \7\ The Exchange also proposes to amend NYSE Rule 476 to conform 
this rule with language in Article IX, Section 3 of the Exchange's 
Constitution prohibiting members of the Board or the Board of 
Executives from serving on the Hearing Board. Members of the Hearing 
Panel, other than the Hearing Officer, are selected from members of 
the Hearing Board. See Article 14, Secs. 2-4 of the Exchange's 
Constitution.
---------------------------------------------------------------------------

Hearing Officer's Authority
    The Exchange also proposes to permit Hearing Officers to handle 
stipulations and uncontested cases without the full Hearing Panel. At 
present, all disciplinary hearings (including settled cases, in which a 
respondent consents to a penalty, and uncontested cases, in which a 
respondent does not file an answer to the charges) must be heard before 
a full Hearing Panel. The Exchange proposes to confer authority on an 
Exchange Hearing Officer to act alone in considering such uncontested 
and settled cases and impose penalties, without a hearing, in order to 
expedite resolution of such matters. Under the proposal, the Hearing 
Officer would convene a panel and hold a hearing if either the 
Enforcement Division or the respondent requests a hearing before a full 
panel, or if the Hearing Officer, on his or her own initiative, calls 
for a hearing. Moreover, the Hearing Officer could not reject a 
stipulated penalty without convening a Hearing Panel.
    Furthermore, the proposed rule change would permit the Hearing 
Officer to resolve substantive legal motions, such as motions to 
dismiss and motions for summary judgment, by no longer requiring that a 
Hearing Panel resolve such motions. The proposed rule change also would 
clarify the Hearing Officer's authority to order pre-hearing discovery 
of documents from the Division of Enforcement and from the respondent.
    Finally, the proposal would clarify the Hearing Officer's authority 
to penalize contemptuous participants and permit the Hearing Officer to 
impose fines on a party for inappropriate behavior of either the party 
or the party's representative. This authority would not be limited to 
dealing with such behavior during a hearing, but would allow for 
sanctions to be imposed at any time during the course of proceedings. 
The Hearing Officer could also exclude, in extreme situations, any such 
persons from further participation in the proceeding.
Conferring Jurisdiction on the Hearing Board Upon Filing of the Charge 
Memorandum
    Under current procedures, the hearing in a disciplinary matter is 
scheduled only upon request of the Division of Enforcement, after a 
respondent's answer is received or the time to file an answer has 
expired. The Hearing Board has no jurisdiction to resolve any issues 
that arise until the Division of Enforcement requests a hearing, and a 
respondent has no avenue of recourse if the respondent believes there 
has been an unreasonable or prejudicial delay. The proposed rule change 
would require the filing of charges with the Hearing Board at the time 
they are served on the respondent. The Hearing Board would assume 
jurisdiction of the matter at that juncture and be able to schedule 
expeditiously hearings, as well as rule on pre-hearing motions.
``Call Up'' Authority Reallocated
    At present, all members of the Board of Executives (as well as all 
Directors other than the Chief Executive Officer) have the right and 
the responsibility to ``call up'' disciplinary decisions for review. 
The Exchange proposes amendments to its Constitution and NYSE Rule 476 
to reallocate this responsibility to members of the Board, Board of 
Executives' members representing the trading floor, members of the 
Regulation, Enforcement and

[[Page 3597]]

Listing Standards Committee, the Exchange Division that initiated the 
proceedings or the respondent, but would preserve the Board's right to 
designate, by rule, categories of members of the Board of Executives 
with this responsibility, if warranted.

Amendment No. 3

    In Amendment No. 3, the Exchange proposes to implement the proposed 
rule change, as amended, on or about April 1, 2006 and attached an 
Exhibit 5 to reflect changes made to the rule text in Amendments No.1 
and 2.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-NYSE-2005-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NYSE-2005-37. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NYSE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSE-2005-37 and should be submitted on or before 
February 13, 2006.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\8\ In particular, the Commission finds that, the 
proposed rule change, as amended, is consistent with Section 6(b)(1) of 
the Act \9\ which requires that the exchange be ``so organized and 
[have] the capacity to carry out the purposes of [the Act]'' and to 
``enforce compliance by its members and persons associated with its 
members with the provisions of [the Act].'' The Commission also finds 
that the proposed amendments relating to the composition of the Hearing 
Panel comport with the requirements of Section 6(b)(3) of the Act,\10\ 
which requires that the rules of a national securities exchange assure 
the fair representation of its members in the selection of its 
directors and administration of its affairs, and provide that one or 
more directors shall be representative of issuers and investors and not 
be associated with a member of the exchange, broker, or dealer. The 
Commission also finds that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act \11\ in that it is designed, 
among other things, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Further, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(7) of the Act,\12\ which, among other 
things, requires that the rules of a national securities exchange 
provide a fair procedure for the disciplining of members and persons 
associated with members.
---------------------------------------------------------------------------

    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(1).
    \10\ 15 U.S.C. 78f(b)(3).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

    Specifically, the Commission believes that the proposed changes to 
the Exchange's disciplinary procedures should help strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization. The Commission also 
believes that the proposal is reasonably designed to improve the 
timeliness, fairness, and efficiency of the disciplinary process to 
address violations of the Exchange's rules and the federal securities 
laws by the Exchange's members and persons associated with members.
    In particular, the Commission believes that it is appropriate for 
the Exchange to provide a structure in NYSE Rule 475 for a summary 
suspension hearing to prohibit or limit a person's access to services 
and to provide a ``call-up'' procedure for Board review of such 
proceedings by members of the Board, certain specified members of the 
Board of Executives, any member of the Regulation, Enforcement and 
Listing Standards Committee, and either the Division of the Exchange 
that initiated the proceeding or the respondent. In addition, the 
Commission believes that it is appropriate for the Exchange to revise 
Article IX of its Constitution to permit the ``call up'' for Board 
review of any disciplinary determination or penalty (other than a 
proceeding involving a written consent to a specified penalty) by any 
member of the Board, certain specified members of the Board of 
Executives, any member of the Regulation, Enforcement and Listing 
Standards Committee, as well as the Exchange Division that brought the 
charges or the respondent. The Commission notes, however, that the 
proposed revision to this ``call up'' procedure contained in the 
Exchange's Constitution would preserve the Board's right to designate, 
by rule, other categories of members of the Board of Executives that 
can require such review by the Board.
    In addition, the Commission believes that the proposed changes to 
Article IX of the Exchange's Constitution and NYSE Rule 476 with 
respect to the composition of the Hearing Panel should expand the 
available pool of panelists with the requisite knowledge of the 
securities industry to serve on the Hearing Panel. At the same time, 
the Commission believes that the proposed requirement that a Hearing 
Panel have at least one member who is engaged in securities activities 
differing from that of the respondent is designed to mitigate

[[Page 3598]]

the perception of bias that may have occurred when a majority of the 
panel members in the same line of business as the respondent was not 
precluded from serving on such panel. Similarly, the Commission 
believes that the proposed changes to allow recently retired members 
and employees of members to serve on the Hearing Board and to allow 
non-NYSE employees to serve as Hearing Officers should enlarge the pool 
of individuals with the requisite expertise to hear and adjudicate 
cases and with the ability to readily serve during regular business 
hours, thereby potentially allowing cases to be resolved more 
expeditiously. Moreover, the Commission notes that the proposal 
specifies that, in any disciplinary proceeding involving activities on 
the floor of the Exchange, no more than one person on the Hearing Panel 
shall have been active on the floor of the Exchange, which also is 
intended to reduce the perception of bias in the Exchange's 
disciplinary process.
    In addition, the Commission believes that the Exchange's proposal 
to expand the Hearing Officer's authority to handle stipulations and 
uncontested cases, procedural and evidentiary matters, and substantive 
legal motions is designed to expedite the hearing process by allowing 
the Hearing Officer to resolve efficiently certain matters that 
currently require action by the full Hearing Panel. The Commission 
notes that, according to the Exchange, these motions often involve 
legal issues that the Hearing Officer is best suited to resolve.
    Finally, the Commission believes that the Exchange's proposal to 
require that the filing of charges be made with the Hearing Board at 
the time they are served on the respondent will allow the Hearing Board 
to immediately assume jurisdiction of the matter and to be able to 
expeditiously schedule hearings, as well as rule on pre-hearing 
motions.

Accelerated Approval of Amendment No. 3

    The Commission finds good cause to approve Amendment No. 3 to the 
proposed rule change, as amended, prior to the thirtieth day after the 
amendment is published for comment in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\13\ Amendment No. 3 clarifies that the 
Exchange intends to implement the proposed rule change, as amended, on 
or about April 1, 2006. The Commission notes that the Exchange has 
represented that it will issue an Information Memo to alert its members 
of the proposed rule change and its implementation date which is 
scheduled to occur on or about April 1, 2006.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).
    \14\ Telephone conversation between Peggy Kuo, Chief Hearing 
Officer, NYSE, and Cyndi N. Rodriguez, Special Counsel, Division of 
Market Regulation, Commission, on January 11, 2006.
---------------------------------------------------------------------------

    Specifically, the Commission finds that Amendment No. 3 provides 
clarification to members and other appropriate parties of the intended 
implementation date of the proposed changes to the Exchange's 
disciplinary procedures that are contained in Article IX of the 
Exchange's Constitution and NYSE Rules 475 and 476 and raises no new 
issues of regulatory concern. For these reasons, the Commission 
believes that good cause exists to accelerate approval of Amendment No. 
3.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Sections 6(b)(1), 6(b)(5), and 6(b)(7) of the 
Act.\15\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b)(1), 15 U.S.C. 78f(b)(5), and 15 U.S.C. 
78f(b)(7).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NYSE-2005-37) and Amendments 
No. 1 and 2 thereto are approved, and that Amendment No. 3 thereto is 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-674 Filed 1-20-06; 8:45 am]

BILLING CODE 8010-01-P
